I am an Associate Professor of Strategy and Entrepreneurship at the London Business School and author of the book "Business Exposed: The naked truth about what really goes on in the world of business" (FT Prentice Hall)

12/13/2012 @ 5:39AM1,009 views

Which Best Practice Is Ruining Your Business?

For many decades, newspapers were big; printed on the so-called broadsheet format. However, it was not cheaper to print on such large sheets of paper – that was not the reason for their exorbitant size – in fact, it was more expensive, in comparison to the so-called tabloid size. So why did newspaper companies insist on printing the news on such impractical, large sheets of paper? Why not print it on smaller paper? Newspaper companies, en masse, assumed that “customers would not want it”; “quality newspapers are broadsheet”.

When finally, in 2004, the United Kingdom’s Independent switched to the denounced tabloid size, it saw its circulation surge. Other newspapers in the UK and other countries followed suit, boosting their circulation too. Customers did want it; the newspaper companies had been wrong in their assumptions.

When I looked into where the practice had come from – to print newspapers on impractically large sheets of paper – it appeared its roots lay in England. In 1712, the English government started taxing newspapers based on the number of pages that they printed. In response, companies made their newspapers big, so that they could print them on fewer pages. Although this tax was abolished in 1855, companies everywhere continued to print on the impractical large sheets of paper. They had grown so accustomed to the size of their product that they thought it could not be done any other way. But they were wrong. In fact, the practice had been holding their business back for many years.

Everybody does it

Most companies follow “best practices”. Often, these are practices that most firms in their line of business have been following for many years, leading people in the industry to assume that it is simply the best way of doing things. Or, as one senior executive declared to me when I queried one of his company’s practices: “everybody in our business does it this way, and everybody has always been doing it this way. If it wasn’t the best way of doing things, I am sure it would have disappeared by now”.

But, no matter how intuitively appealing this may sound, the assumption is wrong. Of course, well-intended managers think they are implementing best practices but, in fact, unknowingly, sometimes the practice does more harm than good.

One reason why a practice’s inefficiency may be difficult to spot is because when it came into existence, it was beneficial – like broadsheet newspapers once made sense. But when circumstances have changed and it has become inefficient, nobody remembers, and because everybody is now doing it, it is difficult to spot that doing it differently would in fact be better.

The short term trap

Some bad practices may also come into existence being bad, but the harmful effects only materialize years after their implementation. And firms implement them because its short-term consequences are quite positive.

For example, in a project with Mihaela Stan from University College London, we examined the success rate of fertility clinics in the UK. A number of years ago, various clinics began to test, select, and only admit patients for their IVF treatment who were “easy cases”; young patients with a relatively uncomplicated medical background. Indeed, treating only easy patients boosted the clinics’ success rates – in terms of the number of pregnancies resulting from treatment – which is why more and more firms started doing it. However, our research on the long-term consequences of this practice clearly showed that selecting only easy patients made them all but unable to learn and improve their treatment and success rate further. Clinics that did do a fair proportion of difficult cases learnt so much from them that after a number of years their success rates became much higher – in spite of treating a lot of difficult patients – than the clinics following the selection practice. Unknown to the clinics’ management, the seemingly clever practice put them on the back foot in the long run.

What this example shows is that the long-term negative consequences of a seemingly “best practice” can sometimes greatly outweigh its short-term benefits. But the problem is that, where managers can see the beneficial short-term effects, they often are unable to understand, when after a number of years their competitive position starts plummeting, that this is due to this “best practice” they implemented years ago. Therefore, the practice persists, and may even spread further to other organizations in the same line of business.

Self-perpetuating myths

What makes some seemingly best practices even more difficult to uncover as harmful is that they can become self-perpetuating. Take the film industry. Film distributors have preconceived ideas about which films will be successful. For example, it is generally expected that films with a larger number of stars in them, actors with ample prior successes, and an experienced production team will do better at the box office.

Sure enough, usually those films have higher attendance numbers. However, professors Olav Sorenson from Yale and David Waguespack from the University of Maryland discovered that, because of their beliefs, film distributors assign a much bigger proportion of their marketing budget and other resources to those films. Once they acknowledged this factor in their statistical models, it became evident that those films, by themselves, did not do any better at all. The distributors’ beliefs were a complete myth, which they subsequently made come true through their own actions. However, the film distributors would have been better off had they assigned their scarce resources differently.

Most experienced executives have strong beliefs about what works and not, and logically they assign more resources and put more effort into the things they are confident about, eager not to waste it on activities with less of a chance of success. As a result, they make their own beliefs come true. The good box office results of the films distributors expected to do well reaffirmed their prior – yet erroneous – beliefs. This reinforced the myth of the best practice, and stimulated it to spread and persist.

Hence, with all the best intentions, executives often implement what is considered a “best practice” in their industry. What they do not know, is that some of these practices are bad habits, masquerading as efficiency boosters, because their real consequences lay hidden. Yet, questioning and uncovering such practices may significantly boost a firm’s competitive advantage, to the benefit of the firm and, eventually, us all.

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